Question

3. NICE clothing Ltd, manufactures and supplies tracksuits to clothing retailers. It has production capacity of 100,000 tracksuits per month. Expected costs and revenues for the next month at 70 percent activity level are as follows: Unit cost Total Direct Materials $5.00 $350,000 Direct labor 10.00 700,000 Variable overhead 2.50 175,000 4.00 Fixed overhead ($280,000/70,000) Total Costs 280,000 21.50 1,505,000 NICE's Supply each tracksuit at $ 35 to retailers. An event management company has offered to purchase 18,000 tracksuits at a price of $20 each. The company required their company name and logo imprinted on the tracksuits. This is estimated at costing $1.00per tracksuit. The management company will cover all distribution costs. a) Find how much additional income will be generated by the NICE clothing if they accept the special order? (3 marks) b) Give your sensible advice to the company regarding this decision. (2 marks)

Answer 1

Basic Points for Accepting a Special Order Decisions: For Special Orders Decisions, the relevant Costs are Variable Manufacturing Costs (Direct Materials, Direct Labor, Variable Overhead). Step 1: Calculation of Unit Product Cost: Direct Materials Direct Labor Variable Overhead Total Unit Product Cost 5.00 10.00 2.50 17.50 a. Calculation of additional Income from accepting Special Order: Incremental Sales (18000 x $20) 360,000.00 Less: Incremental Production Cost (18000 x $17.50) (315,000.00) Less: Additional Logo Printing Cost (18000 x $1) (18,000.00 Additional Income from Special Order $ 27,000.00 b. Sensible Advise regarding Special Order: Accepting Special Order results additional income of $27,000. It is advisable to accept the special order. But some important points shall be remember. 1. The existing customer base shall not be disturbed by that special order. 2. Existing demand in the outside market shall be fulfilled or satisfied first. 3. Accepting special order shall not deteriorate the quality of the product. It is most important.